Britain’s place in the global economy at the start of the 21st century

Intro

Introduction – Britain’s place in the global economy at the start of the 21st
century

Britain has looked outwards to the wider world for many centuries, but its role has
constantly evolved. The British economy, and its place in the wider global economy,
has shifted dramatically from the early days of British sea exploration in the
16th century, through the Industrial Revolution of the
18th and 19th centuries, to the global world of today.

An open economy, combined with robust domestic industries, has long been a crucial
part of the British success story. In the 19th century, the rapidly
industrialising UK was one of the world’s most open economies, with trade climbing
to half of its overall national income – compared to 35–40% in France and Germany
and around 10% in the United States. In this context, ‘openness’ for the UK was
straightforward, with inter-industry trade predominating. Britain exported mainly
manufactured goods – specialising in textiles, shipping and iron[1] – while importing raw materials from the Empire and
other resource-rich countries, today’s emerging economies. It also was the source of
almost half of the world’s foreign direct investment (FDI) at the outbreak of the
First World War, while receiving less than 2% itself, and had one of the world’s
highest rates of net emigration.[2] In leading
the drive towards free trade[3] and
international investment that culminated in the world’s first wave of globalisation
prior to the First World War, the UK’s global stance helped usher in an era of
unprecedented levels of global trade, migration and investment flows fuelled by new
technologies such as iron-hulled ships and the telegraph.

Whereas in the 19th century Britain forced openness through industrial
dominance and naval power, through the 20th century openness became
increasingly secured and influenced through multilateralism, regionalism and the
setting of international rules. Once trade with the Empire and Commonwealth began to
fade in importance after the Second World War, membership of the European Union and
its predecessors became the centrepiece of Britain’s global trade policy to achieve
this.[4]

After plummeting during the Great Depression, Britain’s ratio of trade as a
percentage of GDP did not recover its level at the eve of the First World War until
the 1970s, helped by entry into the EEC and the new wave of globalisation then
emerging. [5] ‘Openness’ for the UK by the end
of the 20th century supported a web of complex supply chains and two-way
flows of export, imports, investment and population movement. Britain’s trade
make-up had shifted again, predominantly exporting and importing manufactured goods
with its near-neighbours and other developed countries, part of a rising trend of
‘intra-industry’ trade, cross-border supply chains and economies of scale seen
throughout the developed world.[6] Britain’s
approach to labour and capital flows had also shifted dramatically: later in the
20th century and into the next, Britain became a major recipient of
FDI, while still remaining an important source, and experienced net immigration
rather than the emigration seen during the 19th century.

The changing world has allowed the UK to play even more to a number of its strengths:
for example, while the UK has been one of the world’s foremost exporters of
financial services for centuries, new communications technologies have enabled these
and other services to play an increasingly important role in British exports.

An open economy and a global trading role continue to underpin British prosperity
today. However, the nature of economic openness – as well as the means of securing
it and the technologies enabling it – has changed significantly. Today, openness is
best promoted by securing market access to trade in both exports and imports at
every stage of the value chain, having a regulatory climate that is both competitive
and enabling to trade, increasing access to labour and investment through migration
and capital flows, and improving the business climate for foreign direct investment.
It is underpinned by a competitive economy, with investment in infrastructure,
education and successful industries.

Today, the UK economy is diverse and its strengths spread right across the UK

Britain has one of the largest and most prosperous economies on the planet –
6th largest in the world in 2012, with a GDP per capita that puts it
3rd among the world’s ten largest economies.[7]

The British economy also has a rich and diverse sectoral mix. The bulk of the economy
is service-based: from the large and world-beating financial & insurance
industry (8% of Gross Value Added (GVA)), through professional, technical and
support services (a further 12%) to the smaller but internationally renowned
cultural sector[8] (taking a 2% share). And,
contrary to popular belief, the UK still makes, shapes and builds things too: its
manufacturing sector is the 9th largest in the world; construction is the
other large non-services sector, with a 6% share; while the oil & gas sector
remains crucial in strategic terms, although its share of GVA has declined to 2%.[9]

The UK’s industrial strengths also touch all corners of the country. For example, the
food & drink industry provides nearly a third (29%) of Scotland’s manufacturing
output; chemicals contribute a quarter (24%) and a third (33%) respectively to the
North East and North West’s manufacturing output; the West Midlands and Wales both
source around a fifth of this from the metals industries (21% and 20%); while
engineering and transport equipment strength is found in the West Midlands (40%) and
South West (44%).[10] Although many regions
have a sizeable financial sector – from 4% of GVA in the East Midlands and Northern
Ireland to double that in Scotland – the financial services industry predominantly
has its focus in London, where it has a 21% share of output and is world-renowned as
a global financial hub.[11]

The UK still has a prominent global trading role

Britain remains a trading nation. Over 65% of its GDP is linked to trade – higher
than that in many other large advanced economies including France (57%), Italy (59%)
and Japan (31%) – with £527bn of imports and £493bn of goods and services being
exported around the world in 2012.[12]

The UK has particular export strengths: for example, it is the second-largest
exporter of services in the world after the United States,[13] while OECD data on goods exports indicates that the
UK’s comparative advantage lies in chemicals, transport equipment and food &
drink.[14] However, its export profile is
marked by its diversity: Britain exports goods in 98% of the 4,913 World Trade
Organization (WTO) product codes.[15]

Britain’s imports are also diverse and are important across the economy, which means
that many non-exporters are as reliant on trade as exporters themselves. In 2008, UK
businesses used 57% of imports as intermediate inputs, with most of the remainder
used by final household consumption or investment demand. A broader range of sectors
is involved in the imported intermediates side of trade than in exports: 48% of
Britain’s imported intermediates by value go into services industries, with some
sectors such as health & social care and retailing & wholesaling that are
mostly domestically focused on the output side being among the more prolific
importers. Manufacturers account for a further 36% of imported intermediates and
construction for another 6%.[16]

Britain is also a key player in world investment markets. In the ten years to 2011,
the UK was the 3rd largest recipient of FDI inflows in the world after
the United States and China, and the largest in the EU.[17] Over the same period, the UK was also a prolific
source of FDI abroad, having the 3rd largest net outward flows in the
OECD.[18] International FDI flows are
important even to sectors that participate relatively little in direct trade of
goods and services. As well as being open to global capital flows, the UK has also
been open to international labour: 14% of workers in 2012 were born outside the UK,
and this proportion has been growing.[19]

"

Closing off from the world is not how the
UK will create and keep the jobs it needs
to provide a decent standard of living for
all its citizens, or maintain its status as a global leader.

Britain now needs to adapt its global trading role for the coming century

For an island nation covering 0.16% of the world’s land area[20] and with 0.9% of its population,[21] British influence around the world remains extensive.
It has a permanent seat on the United Nations Security Council helping to shape
global affairs; it is a major force in the world’s most powerful military alliance,
NATO; its economy is the 6th largest in the world, underpinning its
leadership roles in both the G8 and G20;[22]
it is a leading member of the European Union, the wealthiest trading bloc in the
world; the economy is diverse with export successes in manufacturing and services;
and it is both a major recipient and significant source of global investment.

But the world is changing and so too is Britain’s place in it. The UK must again
reinvent its global role for the 21st Century as the global economy
changes at a staggering rate.

Growth in China and India is shifting the economic centre of gravity to the East – a
process accelerated by the worst financial crisis in the developed world since the
Great Depression. Over the coming decades, although Britain will undoubtedly remain
a prosperous nation, it will see its weight in the world economy fall back as
today’s emerging powers – the BRICs and other countries such as Mexico and Indonesia
– take their places among the world’s largest economies.

The rise of emerging nations is also changing the nature of global trade, with the
emerging world exploiting a comparative advantage in lower labour costs to drive
specialisation in labour-intensive sectors. Britain’s share of trade with Europe and
developed nations has been in decline in the early years of the 21st
century. It remains to be seen what global economy will emerge from this blend of
the intra-industry, regional model of 20th-century globalisation with the
renewed inter-industry model of 19th century globalisation.

Closing off from this world is not how the UK will create and keep the jobs it needs
to pay for public investment and provide a decent standard of living for all its
citizens, or maintain its status as a global leader. We must decide if the best way
to be outward-facing and globally competitive lies in continuing to use and
influence the EU as a base to maximise integration and interdependence with
economies all over the world or, instead, in attempting to reverse this process and
return to a system of bilateral ad hoc arrangements.

This report will explore that key decision regarding the UK’s global future in the
context of the changing global economy and the ongoing debate about the future of
the European Union and Britain’s membership of it. The choices the UK makes will
fundamentally affect its future. One thing is clear: the process of globalisation
will continue, and even accelerate, whatever we decide.

The CBI believes that UK economic prospects would be damaged if it abandoned the
open, trading approach that has served it well for centuries, with all the
consequences that entails for prosperity and jobs. There is no reason to suppose
that the UK cannot continue to thrive and prosper if it embraces and harnesses the
forces reshaping the global economy, using its influence and skills to further
develop the interdependent relationships that help to guide global practices and
bring down barriers to trade in the modern economy.

References

[1] The first country to industrialise,
Britain continued to specialise in the products of the early Industrial
Revolution after the likes of Germany had moved towards more modern industries
like steel and chemicals.

[3] Free trade in Europe peaked around the
1870s – from then until 1914, protectionism was reintroduced on the Continent,
although the world remained more open than it had been. Britain remained a
supporter of free trade until after the First World War, however.

[4] The share of Britain’s share of trade
that takes place with the Commonwealth began declining in the early 1950s – well
before British entry into the Common Market. Library of the House of Commons,
Note SNEP 6497, ‘UK – Commonwealth Trade Statistics’, 2012.

[5] The ratio of the sum of UK exports and
imports to GDP first breached 50% in 1974 – it was 65% in 2012 (in nominal
terms). Haver Analytics UK Database/ONS.

[7] Britain’s economy is sixth-largest in
the world in nominal terms and its GDP per capita in purchasing power parity
terms is third among the world’s top ten (behind the US and Germany). IMF, World
Economic Outlook, April 2013